14 July 2015

China State Council keeps a watchful eye on competition issues in the e-commerce sector

On May 7 2015, upon the approval by the Prime Minister Li Keqiang, the State Council published the Opinion on Striving to Develop E-Commerce and Accelerating the Cultivation of the New Economic Engine (the Opinion). The Opinion consists of 8 sections and 29 key measures that focuses on regulating the competition of the e-commerce market, promoting the establishment of open, fair and healthy competition in the e-commerce market and maintaining the fair market competition. The Opinion also emphasizes curbing monopoly agreements and abuse of market dominance, and preventing conduct from eliminating or restricting the market competition by the review of the concentration of undertakings.

It is only a policy guideline with neither any direct legal binding force nor specific solution in relation to the anti-trust issues in the e-commerce sector. However, the Opinion expressly identifies the competent authorities in charge of the anti-trust issues as the National Development and Reform Commission (NDRC), the State Administration for Industry and Commerce (SAIC) and the Ministry of Commerce (MOFCOM), and further requests these authorities to prudently implement all tasks set out in the Opinion and to issue specific policies by the end of 2015.

The Chinese government has published a number of policies on promoting the development of e-commerce since 2005, but few policies have mentioned anti-trust issues. The Opinion issued by the State Council particularly stresses the anti-trust issues in the e-commerce sector, thereby signaling the Chinese government’s concerns on the potential competition issues in this field.

China is clearly not the only country that keeps an eye on competition issues in the e-commerce sector. The day before the Opinion was issued, the EU Commission formally published its Digital Single Market Strategy and is launching an anti-trust inquiry on e-commerce enterprises that restrict and impede consumers from cross-border transactions. Early in 2000, the US Federal Trade Commission released a policy report that analysed the competition issues and provided some regulatory measures in the B2B e-commerce market. Furthermore, in the last few years, the US and EU anti-trust enforcement authorities have launched a number of anti-trust inquiries and investigations on several e-commerce enterprises (e.g. Amazon, Booking, etc.).

I. The relevant market and major players in the e-commerce sector

In a broad sense, e-commerce engages in the business activities on electronic devices and Internet service platforms. According to its major players, e-commerce could be classified into several types, including B2C (Business to Customer), M2B (Manufacturer to Business), M2C (Manufacturer to Customer) etc. Under competition law principles, the relevant market in relation to e-commerce could be divided into at least two aspects: (1) the online commodity trading market[1], between the online commodity seller (i.e. online business operator) and consumer, which considers the e-commerce service as a platform and media tool; and (2) the e-commerce service market, where the e-commerce service provider (i.e. platform operator) provides a transaction platform and other services to consumers and online business operators. With the diversification of e-commerce, Yihaodian, JingDong and other platform operators that engaged in the online direct sales, also directly compete with the online business operators in the online commodity trading market by providing their own commodities and services on their own platforms.

From a competition law perspective, there is no substantial difference between the online commodity trading market and the traditional commodity trading market. However, the e-commerce service market is a comparatively special market. The e-commerce service market can be regarded as a bilateral market as the platform operators on one hand, such as the media, are in a business relationship with online business operators for providing the platform for the online business operator to sell its commodities, and on the other hand, are consumer-oriented for attracting consumers to purchase the commodities on their platforms by providing products and other additional services.

II. Major anti-trust issues in the e-commerce sector

Based on the above features, the anti-trust issues in relation to the e-commerce sector include:

1. Horizontal monopoly agreement

(1) General horizontal monopoly agreements

In the e-commerce sector, competition occurs among both platform operators and online business operators. Therefore, if they share or exchange sensitive information, or even reach price-fixing and market-allocation agreements, it would constitute a horizontal monopoly agreement prohibited by Article 13 of the Anti-monopoly Law of the People’s Republic of China (AML).

Furthermore, some platform operators engaged in online direct sale business also directly compete with online business operators, so the potential horizontal monopoly issues that might be raised between them should be assessed more carefully. The platform operators have easier access to the transaction and customer information of the online business operators when providing the e-commerce platform service. Therefore, in order to mitigate the risks of being identified as reaching a horizontal monopoly between the platform operators engaged in the online direct sales and other online business operators, the platform operators should carefully deal with the information acquired from the online business operators when providing the platform service, set up an internal firewall system, and keep the sensitive information from the online business operators independent from the online direct sales information of platform operators.

(2) Horizontal monopoly arising from the MFN clause

In the e-commerce service market, quite a few platform operators require the online business operators to accept a most-favored-nation clause (MFN clause) to ensure that the prices of the commodities or service provided by the online business operators on the platform shall be no higher than the price of the same products sold in other channels. If the MFN clauses are widely applied by the platform operators to the online business operators, the transaction prices of the products sold by the online business operators are likely to be consistent, which may result in the risk of reaching a horizontal monopoly agreement among the online business operators[2]. For example, in 2013, the U.S. Department of Justice accused Apple Inc. of colluding with its publishers for manipulating their prices by reaching MFN clauses, which resulted in the same sale prices of e-books in the market[3]. Therefore, when applying MFN clauses, the platform operators should cautiously consider whether such clauses would have similar effects on fixing trading prices, which will further draw the anti-trust concerns of the enforcement authorities.

2. Vertical monopoly agreements

(1) General vertical monopoly

Article 14 of the AML expressly prohibits the resale price maintenance (RPM). From China’s current anti-trust enforcement practice, administrative enforcement authorities are also strict with RPM, i.e. to consider RPM as per se illegal. If manufacturers restrict the resale price of the distributors in the online commodity trading market, there is a great risk of violating Article 14 of the AML.

Furthermore, other common vertical restraints, e.g. conducting channel restrictions and exclusive distribution arrangements, may also take place in the e-commerce sector. For example, online distributors are prohibited from conducting cross-channel sales or selling the products manufactured by other competitors. Pursuant to relevant U.S. and EU provisions and cases, in general, it is usually considered a vertical monopoly arrangement to fully prohibit distributors from the online distribution or sales. However, limited restrictions on the e-commerce channel, including prohibition against distributors to sell to a specific customer group or from setting qualitative requirements in the selective distribution system, shall be analysed on a case-by-case basis, considering the market power, specific restraints and the substitution of channels[4]. Although the provisions regarding the vertical monopoly agreements under Article 14 of the AML do not expressly prohibit non-price resale restraints, considering the market power of the operators and the specific restrictions on distributors, the similar conducts are also likely to be considered as “other monopoly agreements” prohibited under Article 14. In addition, if such conduct facilitate the RPM arrangement, they are also likely to be considered as illegal.

(2) Vertical monopoly arising from the MFN clause

In addition to considering the RPM in the traditional sense (i.e. the direct restriction of the resale price on distributors in the e-commerce platform by suppliers), the MFN clauses in the e-commerce sector can also become a kind of vertical restraint. It is undeniable that MFN clauses may generate some pro-competitive effects, through reducing both parties’ transaction costs and reducing the possibility of the potential price discrimination in the transaction by referring to the most favored trading conditions[5]. However, on the other hand, the platform operators possessing the relative strong market power may deprive the online business operators of their own price-setting right through MFN clauses and may restrain the capability or incentive of the online business operators to lower the price or to offer discounts that are more favorable on other platforms or channels. Hence, it may further reduce the possibility of providing conditions that are more favorable to consumers by the online business operators. In the meanwhile, the ubiquitous MFN arrangement between the platform operators and online business operators to some extent can increase the market entry barriers for the new platform operators, which may have certain foreclosure effect on the relevant market. Recently, some EU countries have inquired into certain vertical restrictions in relation to MFN clauses between platform operators and online business operators[6].

MFN clauses also exist in China (including but not limited to the e-commerce sector). For example, the platform operator requires the online business operators to covenant that the price on its platform shall be the lowest prices in other channels (whether online or offline) or the online business operators would be punished for violating such requirement. In return, it also indirectly forces the online business operators to adjust or maintain the resale price of other offline distributors or retailers accordingly, which would further increase the risk of a violation of the AML. As abovementioned, such similar MFN clauses may not only give rise to the horizontal monopoly agreements to manipulate prices between platform operators and online business operators, but also the platform operators’ restriction on the resale prices of the online business operators or other vertical monopoly agreements. Though currently the Chinese enforcement authorities have not yet publicly declared whether the MFN clauses are illegal or not, in the context that the Opinion stresses the anti-trust issues in the e-commerce sector, the possibility that the MFN clause may become the priority of the enforcement authorities in the future cannot be dismissed. Therefore, it is necessary for those e-commerce enterprises widely applying MFN clauses (especially platform operators) to review their current business model and similar clauses with more detail in order to mitigate potential anti-trust risks.

3. Abuse of market dominance

Similar to the traditional commodity trading market, the online business operators with a market dominant position may also inflict predatory pricing, excessive pricing, refusal to trade, tie-in sale, price discrimination and other abusive behavior in the online commodity trading market.

For the platform operators, the potential abuse of market dominance is something different. The premise of determining the abuse of market dominance of platform operators is to identify its market dominant position in the relevant market. As mentioned earlier, the e-commerce service market is a bilateral market and the market powers of all parties are interactive in some degree, which causes complications when determining the market power of the platform operators. On one hand, the platform operator’s ability to attract consumers directly affects whether the online business operators will cooperate with such a platform. On the other hand, whether consumers choose an online platform to purchase commodities is subject to whether the platform operator is able to provide more products or services on its platform to satisfy consumers appeal. Therefore, it should take certain factors, including the platform operators’ ability of controlling the price, quantity and other transaction conditions, the ability to prevent other enterprises from entering the relevant market and other factors into account, when determining whether a platform operator possesses the market dominant position.

In the e-commerce service market, some platform operators are likely to modify trading rules arbitrarily, impose tie-in sales, restrict online business operators (e.g. to direct screen out and restrict the cross-platform transactions or information), and impose restrictions on the trading conditions of the online business operators (e.g. the exclusive arrangement, MFN clause, etc.)[7]. If a platform operator is identified as possessing market dominance, these behaviors may constitute the abuse of market dominance. In 2014, Amazon was accused of abusing its market dominance in Germany by forcing book publishers to accept its online sale price and delaying the delivery of books deliberately[8]. In June 2015, because of the MFN clause signed with the book publishers, EU competition authorities inquired into Amazon for the abuse of its market dominance[9]. In China, there is currently no typical case in relation to the investigation specific to the business operator in the e-commerce sector for its abuse of dominance.

Even if the platform operators are not identified as possessing market dominant positions, the imposition of unfair trading conditions on the online business operators, tie-in sales and refusals to deal are also risky under the Anti-unfair Competition Law of People’s Republic of China (Anti-unfair Competition Law). At present, the Anti-unfair Competition Law is under revision and is expected to provide clearer understanding on the unfair competition conduct in the Internet industry in the future. Therefore, when implementing some special trading method or restrictive measures, the platform operators still need to consider the potential compliance risk carefully.

4. Concentration of undertakings

The concentration of undertakings in the e-commerce sector could be concentrations that took place within either the online commodity trading market or e-commerce service market (e.g. the transactions between Didi and Kuaidi, 58 Tongcheng and Ganji as well as Ctrip and e-Long). Additionally, it could be concentrations covering both the commodity trading market and e-commerce service market, namely the concentration between the platform operators and the online business operators (e.g. the concentration between Walmart and Yihaodian). Where the concentration of undertakings in the e-commerce sector occurs in the same market, MOFCOM is likely to focus on the level of market concentration and market entry barriers after the concentration, similar to its practice in other sectors. Where the concentration of undertakings covers both the online commodity trading market and e-commerce service market, MOFCOM is likely to consider whether the undertaking could leverage its power in one market to foreclose competition in the other market. For example, when Walmart acquired the control of Yihaodian’s online direct sale business in 2012, MOFCOM considered that Walmart might leverage its competitive strength in the offline brick-and-mortar retail market into the online commodity trading market of Yihaodian. MOFCOM also considered that the post-transaction entity may foreclose competition in the valued-added telecommunication industry (VAT) through its combined online and offline strength. As a result, MOFCOM finally imposed some restrictions on the scope of the transaction and Walmart’s post-transaction operation[10].

Within the context of “Internet+”, the e-commerce industry in China is confronted with reorganization and reform. With the development of O2O business, many platform operators focus on the mergers of the offline enterprises (e.g. the equity acquisition of Intime Department Store by Alibaba). However, an increasing number of offline enterprises or even competitors, such as steel enterprises and logistics enterprises, also enter into the online e-commerce service market to better integrate market resources and optimize allocations in the online and offline markets. In the future, there will be more trans-market concentrations of undertakings with considerable market power in the commodity trading market and e-commerce service market, which will be more likely to draw concerns from the enforcement authorities. Therefore, in the early stages of a relevant merger, it is advisable to identify the anti-competitive effects and assess the merits for filing a notification. For those mergers that might foreclose competition, undertakings should invoke some preparatory measures and consider the solutions to the potential anti-competitive effects to ensure the clearance for the transaction.

III. Conclusion

In recent years, e-commerce in many countries has achieved remarkable progress and significant improvement with respect to both the coverage of industries and the content and forms of e-commerce. Currently, except for the abovementioned Walmart case, the Chinese administrative enforcement authorities have not announced any anti-trust enforcement relating to the e-commerce sector. In this context, the release of the Opinion indicates that the government is increasing its focus on anti-trust enforcement in the e-commerce sector. Therefore, it is advisable that both the e-commerce platform operators and the online business operators should attach great importance to the issues in relation to the exchange of sensitive information, MFN clauses, channel restriction, imposition of unfair trading terms and trans-market concentration. In the meantime, business operators in the e-commerce sector should review their current business models, reinforce the competition compliance requirement and carefully deal with the current conflict between online and offline transactions to avoid or mitigate the risks of violating the AML.

[1]Certainly, from the demand substitution perspective, online commodity trading and offline commodity trading are substitutable and competitive with each other. As a result, whether online commodity trading constitutes a separate market from offline commodity trading should be analysed based on the specific product/service. For the purpose of simplified analysis, we define it as “online commodity trading market” for the moment.

[2]See The Antitrust Review of the MFN Clauses in Network Distribution System, Huang Yong and Tian Chen, Ed. 9 2014, Legal Forum.

[3]United States of America, v. Apple Inc., 12 Civ. 2826 (DLC).

[4]See Can Antitrust Law Control E-Commerce? A Comparative Analysis in Light of U.S. and E.U. Antitrust Law, Andreas Kirsch and William Weesner, 12 U.C. Davis J. Int’l L. & Pol’y 297.

[5]See Note 2

[6]In October 2013, the Federal Cartel Office in Germany launched an investigation on the MFN clauses between Amazon and the third party publishers, and terminated the investigation on the condition that Amazon removed the relevant MFN clauses. In December 2014, the competition enforcement authorities in Sweden, France and Italy launched anti-trust investigation on the MFN clauses agreed by the hotel reservation website, www.booking.com (“Booking”), and its partner hotels, and preliminarily found such clauses violated the anti-trust law, harmed the competition of relevant market and restricted the entry of new competitors.

[7]See 2013 - 2014 China’s Annual E-commerce Legal Report, http://www.100ec.cn/zt/upload_data/down/2013-2014flbg.pdf.

[8]See http://www.law360.com/articles/557108/german-amazon-e-books-antitrust-row-catches-eu-s-eye.

[9]See http://www.reuters.com/article/2015/06/11/us-eu-amazon-idUSKBN0OR0YY20150611.

[10]See MOFCOM Announcement No.49 2012, the Conditional Clearance of the Acquisition of 33.6% Shares of Niuhai Holding by Walmart Following the Anti-Monopoly Review, http://fldj.mofcom.gov.cn/article/ztxx/201303/20130300058730.shtml.

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